This is the second part of my column on cracking down on crypto insider trading. In the first part, I addressed the criminal charges against Nathaniel Chastain, a former product manager at NFT marketplace OpenSea. I also discussed the SEC’s allegations against former Coinbase employee Ishan Wahi, his brother and friend, based on the insider trading “embezzlement” theory.
Turn on… is a monthly opinion column written by Marc Powers, who, after serving with the SEC, has spent much of his 40-year law career working on complex securities cases in the United States. He is now an Associate Professor at Florida International University College of Law, where he teaches “Blockchain & the Law”.
Since the United States vs. O’Hagan In the 1997 Supreme Court case, the misappropriation theory of insider trading liability was explicitly recognized. Both before and after this date, the “misappropriation” of trade secrets or confidential information used in connection with stock trading was an active area of enforcement and prosecution by the Securities and Exchange Commission.
Examples include a former Wall Street Journal writer in United States vs. Winans; Staff at the Hudson News magazine stand in SEC vs. Smath; a printer at a company that has printed tender documents Chiarella versus the United States; and more recently financial analysts in United States vs. Newman and Salman against the United States. On the same day that the SEC indictment was filed against Ishan Wahi and his two associates, the US Attorney for the Southern District of New York unsealed a parallel indictment charging the same three defendants with wire fraud and wire fraud conspiracy .
Whistleblowers who receive material, nonpublic, or confidential information from a Whistleblower violate insider trading rules when they know that the Whistleblower has breached a duty owed to another and have gained personal benefit from the tip. The Supreme Court ruled in 2016 Salman if the personal benefit does not have to be of a financial or non-cash nature. The benefit requirement is met by gifting this information to a business relative or close friend.
Honestly, it’s time the SEC and US law firms focused on real crime and fraud. That’s what insider trading is: fraud. It is an unfair trading advantage given by someone who learns confidential information and trades with it for economic gain and gain. But this wahi Fall raises the question of what exactly insider trading is. As I said before, insider trading involves dealing in “securities”. Accordingly, to make its case, the SEC alleges that at least nine of the tokens listed on Coinbase and pre-traded by the defendants fit the Howey Test’s “investment contract” analysis. But do they really?
The SEC says some of the tokens are “purportedly” governance tokens but are “securities.” So it’s worth heeding that warning shot. For those token issuers taking solace from attorneys who have decreed their tokens non-securities because they are governance tokens, beware — and perhaps get another opinion from a qualified securities attorney.
Interesting aspects of this particular case aside, what does this mean for others, such as Coinbase itself? Well, the SEC claims that certain tokens are “securities” on their exchange. If so, Coinbase should be registered as a “stock exchange” under the Securities Exchange Act of 1934. Not surprisingly, a few days after the SEC filing, it was reported that Coinbase is under investigation by the SEC.
In my view, SEC Chairman Gary Gensler is using this case as yet another “land grab” to strip the Commodity Futures Trading Commission of jurisdiction over digital assets — and crypto in particular. I’ve said that before. CFTC Commissioner Caroline D. Pham also sees through the SEC’s efforts.
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On the day of filing the complaint, they problematic a public statement saying, “The SEC’s allegations could have far-reaching implications beyond this isolated case and underscore the importance and urgency of regulators working together.” Important issues are best addressed through a transparent process that encourages the public to develop appropriate policies. […] Regulatory clarity comes from being open and not in the dark.”
Pham also said: “SEC vs Wahi is a remarkable example of ‘regulation by enforcement’.” Four days later, on July 25, CFTC Chairman Rostin Behnam spoke at the Brookings Institute and reiterated the view that the CFTC would be the natural and best regulator of crypto.
What about these nine “issuers” of the nine tokens that the SEC claims are securities? Well, they too can rest assured that they will be subject to independent investigations by SEC officials looking into registry violations. Any of their ICOs or offerings are subject to the five-year statute of limitations for the SEC to take enforcement action against them. Stay tuned.
The opinions expressed are solely those of the author and do not necessarily reflect the views of Cointelegraph or Florida International University College of Law or its affiliates. This article is for general informational purposes and should not be construed as legal or investment advice.